Economics Diagram Bank

1) i) More resources are allocated towards production of consumer goods, so production of

capital goods decreases: producing a certain amount of capital goods is the opportunity
cost of producing more consumer goods.

ii) Due to the discovery of new resources, the productive potential output of the country
increases and the PPC shifts outwards.

iii) Due to the destruction of resources, the productive potential output of the country
decreases and the PPC shifts inwards.
 iv) Due to high unemployment, resources are underutilised and production occurs at a
point of inefficiency.

2) i) Price reduces (from P to EP) until quantity demanded is equal to quantity supplied.

ii) Due to the increase in indirect taxes, the supply curve shifts to the left, equilibrium
quantity decreases from EQ1 to EQ2, and equilibrium price increases from EP1 to EP2.
iii) Due to the increase in direct taxes, the demand curve shifts to the left, equilibrium
quantity decreases from EQ1 to EQ2, and equilibrium price decreases from EP1 to EP2.

iv) Due to the increase in subsidies, the supply curve shifts to the right, equilibrium
quantity increases from EQ1 to EQ2, and equilibrium price decreases from EP1 to EP2.

v) Due to the fall in disposable income, the demand curve shifts to the left, equilibrium
quantity decreases from EQ1 to EQ2, and equilibrium price decreases from EP1 to EP2.
vi) Due to the increase in the cost of production, the supply curve shifts to the left,
equilibrium quantity decreases from EQ1 to EQ2, and equilibrium price increases from
EP1 to EP2.

vii) Due to the increase in disposable income, the demand curve shifts to the right,
equilibrium quantity increases from EQ1 to EQ2, and equilibrium price increases from EP1
to EP2.

viii) Due to a change in one of the non-price factors affecting demand, the demand curve
shifts to the right, equilibrium quantity increases from EQ1 to EQ2, and equilibrium price
increases from EP1 to EP2.
ix) Due to the consumers realising fish is healthy, the demand curve shifts to the right.
Due to the government limiting supply, the supply curve shifts to the left. Depending on
the magnitude of the shifts in the demand and supply curves, the equilibrium quantity
may increase or decrease from EQ1 to EQ2. The equilibrium price increases from EP1 to
EP2.

x) Due to a change in one of the non-price factors affecting supply, the supply curve
shifts to the left, equilibrium quantity decreases from EQ1 to EQ2, and equilibrium price
increases from EP1 to EP2.
 xi) If the price of jeans X, which is a close substitute of jeans Y, increases, show the
impact on equilibrium price and quantity of jeans Y using a demand and supply diagram.

xii) If the price of tea increases, show the impact on the equilibrium price and quantity of
sugar, which is a complementary good, using a demand and supply diagram.

3) Relatively elastic demand: a small %ΔP leads to a large %ΔQD. The value of PED is
greater than 1. Eg. a 2% increase in price causing a 15% contraction in quantity
demanded (PED -7.5).
Relatively inelastic demand : a large %ΔP leads to a small %ΔQD. The value of PED is
less than 1. Eg. a 15% increase in price causing a 3% contraction in quantity demanded
(PED -0.2).
4) Relatively elastic supply:: a small %ΔP leads to a large %ΔQS. The value of PES is
greater than 1. Eg. a 2% increase in price causing a 15% extension in quantity supplied
(PES 7.5).
Relatively inelastic demand : a large %ΔP leads to a small %ΔQS. The value of PES is
less than 1. Eg. a 15% increase in price causing a 3% extension in quantity supplied
(PES 0.2).

5)

6)
7) Due to an increase in consumer spending, investment by firms, government expenditure,
or net exports, aggregate demand increase from AD to AD /, aggregate supply extends,
the general price level increases from PL 1 to PL2, and real GDP increases from Y1 to Y2.
8) Due to an increase in the cost of production, aggregate supply decreases from AS to
AS/, aggregate demand contracts, the general price level increases from PL1 to PL2, and
real GDP decreases from Y1 to Y2.

9) i) The dollar appreciates due to a decrease in the supply of dollars; the supply curve
shifts to the left, resulting in a higher equilibrium exchange rate.

ii) The dollar appreciates due to a decrease in the demand for dollars; the demand
curve shifts to the left, resulting in a lower equilibrium exchange rate.
10. Economic Growth (Short run & Long run)

Point A to B- Economic Growth in the short run [increase in real GDP]

Point B to C- Economic Growth in the long run [increase in Productive Potential
Output]
12)